Monday, April 11, 2011

GUAJARDO Jose A., COHEN Morris A., KIM Sang-Hyun, NETESSINE Serguei
INSEAD Working Paper 2011/49/TOM

Using a proprietary dataset provided by a major manufacturer of aircraft engines, we empirically investigate how product reliability is impacted by the use of two different types of after-sales maintenance support contracts: time and material contracts (T&MC) and performance-based contracts (PBC). We offer a number of competing arguments based on the theory of incentives that establish why product reliability may increase or decrease under PBC. We build a two-stage econometric model that explicitly accounts for the endogeneity of contract choices, and find evidence of a positive and significant effect on product reliability created by the incentives under PBC. The estimation of our model indicates that product reliability is higher by 25-40% under PBC compared to under T&MC, once the endogeneity of contract choice is accounted for. Our results are consistent with two mechanisms for reliability improvement under PBC: more frequent scheduled maintenance and better care performed in each maintenance event.

KIM Sang-Hyun, NETESSINE Serguei
INSEAD Working Paper 2011/54/TOM revised version of 2010/106/TOM

During development of a highly innovative product there is often considerable uncertainty about component production cost, and it is of interest for both the manufacturer and the supplier to engage in a collaborative effort to reduce this uncertainty and lower the expected cost. Despite the obvious benefits this brings, the supplier may be reluctant to collaborate as he fears revealing his proprietary cost information. We investigate how information asymmetry and procurement contracting strate- gies interact to influence the supply chain parties' incentives to collaborate. We consider a number of procurement contracting strategies, and identify a simple strategy, Expected Margin Commitment(EMC), that effectively promotes collaboration. The manufacturer prefers EMC if collaboration leads to a large reduction in unit cost and/or demand variability is low. Otherwise, a screening contract is preferred. We also find that, paradoxically, ex-post efforts to enhance supply chain efficiency may hinder ex-ante collaboration that precedes production.